Equity income, as your friendly neighbourhood asset manager has no doubt been telling you, is back.
But “back” in this instance may not mean back geographically. Rather than returning as UK equity income—a pillar of UK investors’ portfolios for many years—global funds are moving to the fore.
UK equity income was a hardy perennial in domestic investors’ portfolios, ebbing and flowing at the top of the charts, generally between Sterling Corporate Bonds and All Companies, depending on the prevailing risk appetite. That was then…
Between 2003 and 2009, the domestic sector attracted £10.4bn, while its global equivalent took in just £1.3bn, with the UK ahead in terms of asset gathering for each of these years. From 2010, flows begin to turn in global’s favour, as the sector gathered more than UK for the first time. Indeed, over subsequent years, UK equity income has only been in the black for one (2014). Over the 20 years, global equity income has seen inflows of £6.5bn and UK equity income outflows of £2.3bn. Since 2016, the latter has suffered outflows of more than £16bn.
Both global and the UK had been in the red, flow-wise, in 2015 and 2021, which is not surprising given that the low-rate environment has not favoured the strategy. What is perhaps surprising is that when the global sector returned to favour in 2022 as monetary policy tightened, taking £1.4bn, the UK was still in redemption mode, shedding £2.6bn.
From Head- to Tailwind
We’ve previously pondered the prospects of this out-of-favour asset class, which have been boosted by the return of inflation and the rate tightening that has followed this.
For the first two decades of the century, accommodative monetary policy and low rates had favoured growth stocks such as technology, as this environment increases the value of future cash flows—expected growth—relative to current ones (dividends).
UK equity income was further hit by the suspension of many dividends from FTSE 100 members in the COVID crisis. However, performance has rebounded since the “vaccine rally” of November 2020, and the market has in general favoured income-paying stocks subsequently.
All this should have been grist to the diesel-powered mill of the UK equity income sector over the past year, propelled by the outperformance of energy and financials coupled with the tanking of tech. Certainly, UK equity income enjoys structural biases that should have served it well in this market, compared to its global peer. For example, global equity income has a whopping 12.9% overweight to tech relative to its UK sibling—the largest difference between the two at a sector level. Meanwhile, it is underweight financials by 4.6% and energy by 4.5%, with the global sector at slightly more than half the weight of the UK (chart 2).
That, however, is not what happened. The 2022 returns for the IA UK Equity Income sector were -2.2 per cent, with the IA Global Equity Income sector returning -1.7 per cent.
